I’m often asked if economic recovery is around the corner and the bear market is gone. I share the views of Jack McHugh at the Big Picture:
“Nothing sows the seeds of doubt in the minds of money managers quite like a bear market rally. Thoughts like, “Is the bottom in?”, and “Am I missing a once in a generation buying opportunity at the beginning of a great new bull market?” cause institutional investors to reach for the antacid tablets. For many of them, losing money in a bear market is no sin, as long as everyone else is taking on water, too. But missing out on the gains of a bull market is a career-threatening problem. As such, large investors are all competing to strain their eyes in looking for Ben Bernanke’s “green shoots”. They almost hunger for the early bits of growth that often presage an economic recovery. What they forget is that many of these green shoots will turn out to be weeds, or, what’s worse, be lost to a spring frost.
I’m not trying to be an eternal pessimist, either, since there are indeed some hopeful signs. As you can see from the articles below, the credit markets are starting to pick up. Even if prices in the dicier parts of fixed income aren’t up as much as are stocks since March 6, they are starting to tick higher. LIBOR continues to recede, high yield bond issuance is climbing off the mat, and even carry traders are beginning to feel safe enough to re-establish risky positions. With all the cash now gushing out of Washington, I suppose these nascent signs of improvement should be both expected and welcomed. But since one of the primary goals of these scribblings is to offer a perspective that is ever mindful of risk management, I would like to call everyone’s attention to the fact that these same hopeful signs were on display in the autumn of 2007 and the spring of 2008.
The spring of 2009 may yet bring more upside for investors, but they should be mindful of the fact that when individuals, corporations, and even some countries all try to delever on a global basis, false springs are more the rule than the exception. After the 1929 crash, the Hoover administration spied similarly hopeful signs in the U.S. economy. “Recovery is just around the corner”, is first attributed to economist, Irving Fisher, but Team Hoover repeated this phrase and variations of it right up until he was crushed by the landslide election of FDR in 1932. It is true the U.S. economy in 2009 has yet to see the massive reversals suffered during the Great Depression, but the root causes of each period — easy monetary policy and an over-reliance on debt — are the same.
What’s different this time is that Mr. Bernanke and the successive Treasury Secretaries he’s teamed up with have long since ditched conventional policy responses. It’s been said, and I agree, that trying to foster sustained growth in an economy weighed down by too much debt is like trying to start a sustainable fire using wet logs. The matches and gasoline (some stimulus and a low funds rate) didn’t work on our debt-soaked economy, so Mr. Bernanke is resorting to the blowtorches and rocket fuel (a lot of stimulus and quantitative easing). I don’t know enough about the chemistry of combustion to accurately predict what will happen next. But my advice would be to stand well back and wait to see what happens next. I’ll risk being underinvested during this rally. Even if he’s successful, Mr. Bernanke might set fire to more than just the logs.”